ANALYSIS: San Diego, San Jose Lead the Way in Local Pension Reform

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ANALYSIS: San Diego, San Jose Lead the Way in Local Pension Reform

Voters in the cities of San Diego and San Jose sent a strong message that reverberated across the nation in June 2012 when they overwhelmingly approved significant public pension reforms that affect not only future employees, as all other previous state and local pension reform efforts in recent years had, but existing employees as well. The change prompted national political analysts to speculate that the success of such measures in San Diego and San Jose might inspire similar changes to state and local governments around the country.

“I want to thank the voters of San Jose for their commitment to fiscal reform and to creating a more sustainable future for our children and grandchildren,” said San Jose Mayor Chuck Reed as the returns poured in on Election Night and it became clear that the measure was going to be decided in his favor.1 The Democratic mayor had been the chief champion of the pension reform measure.

Under the San Jose measure, Measure B, pension benefits for current and future city employees will be reduced, city workers will be required to pick up a larger portion of pension and retiree health-care costs, disability retirements will be more strictly limited, and voters must approve any future employee benefit increases. Among Measure B’s provisions are the following:

• Current employees will have to pay a larger portion of their salaries to maintain their existing benefits. This will mean paying up to 16 percent of their salaries, not to exceed half the normal cost of their benefits, which does not include unfunded liabilities. (The city currently pays nearly three-quarters of the normal cost of employees’ pensions.) In anticipation of the contentious nature of this provision, Measure B includes a clause that directs an equivalent amount of savings to be obtained through salary reductions, should a court rule the provision unenforceable.
• Employees who do not choose to pay the higher contribution rates to maintain their pension benefit levels going forward will be placed in a new, less generous plan.
• New employees will be placed in more limited pension plans, and the city has the option to enroll employees in Social Security or establish a 401(k)-style defined-contribution plan for them.
• Employees must pay for at least half the normal cost and unfunded liabilities of retiree health-care plans.
• The city will no longer issue extra pension payments, sometimes called the “13th check,” to retirees when the pension investment funds experience “excess” returns.
• The automatic annual cost of living adjustments (COLAs) paid to retirees is reduced from 3 percent to 1.5 percent for new employees and current employees that opt into the newer, less generous plan, and COLAs may be suspended for up to five years if the city declares a fiscal emergency.
• Disability retirements are limited to cases where city employees are “incapable of engaging in any gainful employment for the City, but not yet eligible to retire.”
• All future city employee pension or other post-employment benefits increases must be ratified by voters.2

Nearly three months after the passage of Measure B, the San Jose City Council passed an ordinance to establish the new, lower pension plan for future hires. The plan maintains the traditional, defined-benefit plan format, but non-safety employees will now receive 2 percent of their final salary for each year worked-down from the current 2.5 percent-and total payouts may not exceed 65 percent of final salary. In addition, the minimum retirement age to receive full benefits is raised to 65 from the current 62.

San Diego’s pension reform measure, Proposition B, goes even further.

• All new city employees except sworn police officers will receive 401(k)-style defined-contribution retirement plans rather than defined-benefit pensions. The city’s contribution levels will be capped at 9.2 percent of final salary for general employees and 11 percent for public-safety employees.
• Employees’ base compensation, upon which their pension benefits are calculated, will be limited to exclude supplemental and specialty pay.
• The city will be required to begin negotiations with its labor unions by calling for employees’ base compensation to be capped for six years at fiscal year 2011 levels. This bargaining position may be overturned with a two-thirds vote of the city council.
• Newly hired police officers’ annual pension benefits will be capped at 80 percent of their final salaries.
• City officers and employees convicted of a felony related to their positions will lose their pension benefits.
• A previous city charter provision that a majority of employees or retirees was required to approve changes to their retirement benefits was eliminated.
• The city will be required to annually publish the amounts of pension benefits paid to retirees, although retirees’ names will be redacted to protect their privacy.3

Voters had already approved a previous pension reform measure during the November 2006 election that required voter approval of future city employee pension benefits increases.

San Diego’s Independent Budget Analyst estimated that Proposition B would result in net savings to the city of approximately $950 million over 30 years if the six-year pay freeze were to go into effect. If no pay reductions are realized, the fiscal impact would be about the same as the status quo, and would end up costing the city about $13.5 million over the same 30-year time frame.4

San Diego and San Jose have remarkably similar stories of public pension woe. San Diego is facing a nearly $2.2 billion pension deficit.5 In addition, its unfunded retiree health care liability was estimated at nearly $1.1 billion in 2011, but a deal reached between the city and its labor unions that year is expected to save over $700 million over 25 years.6 The city stopped offering retiree health care benefits to employees hired after June 30, 2005. San Diego’s annual pension payments have increased from $43 million in 1999 to $231 million in 2012, and now consume about 20 percent of the general fund budget.7

San Jose is facing a $1.6 billion pension deficit and a $1.9 billion retiree health care shortfall.8 The city’s annual pension contributions have risen from $73 million in 2001 to $245 million in 2012, and now account for 27 percent of its general fund expenditures.9

Besides the fact that both cities are located in California, they are both major cities of roughly the same size. San Diego is the eighth-largest city in the United States, with a population of just over 1.3 million. San Jose is the tenth-largest city in the nation, with a population of just under 1 million. Both cities have a sizable Democratic plurality in voter registration (40 percent Democrat versus 28 percent Republican in the last election in San Diego and 46 percent Democrat versus 22 percent Republican in San Jose).10 As noted above, both took the bold new step of tackling pension reform for current employees, in addition to future hires. And both reform efforts were approved by similar landslides, with Proposition B passing with 66 percent of the vote in San Diego and Measure B passing with 69 percent of the vote in San Jose.

It is probably safe to say that the resulting legal headaches both cities face will be similar as well. Public employees’ unions have filed lawsuits against the measures in both cities, although implementation is proceeding as planned for the time being.

The ultimate fate of the San Diego and San Jose public pension reforms will likely not be known for many years, and could end up being determined more by events in courtrooms than at ballot boxes or around collective bargaining negotiating tables. Regardless of the ultimate outcome, one thing is certain: many other cities around California and across the nation will be watching to see if they should follow in the footsteps of San Diego and San Jose.

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Endnotes

1 John Woolfolk, “All precincts counted: San Jose passes pension reform,” San Jose Mercury News, June 5, 2012, http://www.mercurynews.com/elections/ci_20790991/early-returns-san-jose-voters-approving-pension-reform (retrieved February 10, 2013).

2 City of San Jose, Office of the City Clerk, “Full Text of Measure B,” February 8, 2012, http://www3.sanjoseca.gov/clerk/elections/2012Election/fulltextmeasureb.pdf (retrieved February 8, 2013).

3 County of San Diego, Registrar of Voters, “Sample Ballot & Voter Information Pamphlet: Presidential Primary Election – Tuesday, June 5, 2012,” pp. 15-28, http://www.sandiego.gov/city-clerk/pdf/pamphlet121221.pdf (retrieved February 10, 2013).

4 Craig Gustafson, “Pension Measure Would Save $950M, Report Says,” U-T San Diego, March 20, 2012, http://www.utsandiego.com/news/2012/mar/20/tp-pension-measure-would-save-950m-report-says/ (retrieved February 10, 2013).

5 Craig Gustafson, “City Voters Approve San Diego’s Pension Overhaul,” U-T San Diego, June 6, 2012, http://www.utsandiego.com/news/2012/jun/06/tp-city-voters-approve-san-diegos-pension-overhaul/ (retrieved February 10, 2013).

6 City of San Diego, Office of the Mayor, “City Council Takes First Step to Approve Historic Retiree Health Care Reform Pact,” May 13, 2011, http://www.sandiego.gov/home/pdf/110513factsheet.pdf (retrieved February 10, 2013).

7 “San Diego, San Jose Voters Embrace Pension Cuts,” CBSNews.com, June 6, 2012, http://www.cbsnews.com/8301-201_162-57448189/san-diego-san-jose-voters-embrace-pension-cuts/ (retrieved February 10, 2013).

8 Daniel Borenstein, “San Jose faces $3.5 billion debt for employee retirement programs,” Contra Costa Times, March 3, 2012, http://www.contracostatimes.com/news/ci_20090713/daniel-borenstein-san-jose-faces-3-5-billion (retrieved February 10, 2013).

9 “San Diego, San Jose Voters Embrace Pension Cuts,” CBSNews.com.

10 California Secretary of State, “Report of Registration as of May 21, 2012: Registration by Political Subdivision by County,” 2012, pp. 147, 155, http://www.sos.ca.gov/elections/ror/ror-pages/15day-presprim-12/politicalsub1.pdf (retrieved February 10, 2013).